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Comparing the PIIGS

It's not a moment for celebration when your country becomes part of an acronym that represents the fattest and dirtiest-looking farm animal. The term "PIIGS" -- for Portugal, Ireland, Italy, Greece, and Spain -- has been around for a while, but it's recently become a household name because of the massive crisis in Europe, beginning with falsification of economic statistics in Greece and the resulting troubles of the rollover of euro-denominated debt.

In an unprecedented move, Greece received a joint bailout from the European Central Bank and the International Monetary Fund, but the euro's troubles are far from over. I've been expecting this for some time, and I want to take a closer look at the members of the infamous PIIGS club for more insight on the issue.

From PIIGS to pigletsComparing the herd, you can see that the PIIGS club is just a smaller version of the disorganized disparity that is the 27-country European Union.

Portugal is a piglet, whose economy ranks 17th in size in the EU. Its level of government indebtedness is less than America's, at 84.6% of GDP, but it has risen by about 20% in the past three years. The unemployment rate stands at 10.4%, spread across a population of 10.6 million.

Italy is the fattest of the PIIGS, having the fourth-largest economy in the EU. The Italian economy shrank by 4.8% in 2009, and the government is even more profligate than America's, with a government debt-to-GDP ratio of 115.5%. Italy has 58.1 million residents and a 7.5% jobless rate.

Ireland used to be a Celtic tiger before it joined the PIIGS herd. For years, its economy -- 15th in size in the EU -- would surprise to the upside, but that ride ended in 2008. In 2009, the economy shrank by 7.5%. The Irish government has a rate of indebtedness similar to Portugal's, at 82.9% of GDP, but it has to be noted that the debt burden has tripled in the past three years from 25.4%. The tiny population of 4.4 million is suffering a very high unemployment rate of 13.3%.

Greece is the most talked-about farm animal, but it's not nearly as fat as the rest. The Greek economy is 13th in the EU by size, but debt to GDP is among the highest at 125%. The unemployment rate is sure to go up from 9.7% in 2009, since in 2010 the Greek government is making budget cuts that equal 10% of GDP.

Spain is interesting on many fronts. The economy is the EU's fifth-largest, and debt to GDP is quite low by EU standards at 66.3%. (That's lower than Germany's figure, which is considered conservative.) The economy shrank by 3.6% in 2009, and it's unlikely to fare much better in 2010, with unemployment at 20% and the government preparing to implement some pretty tough fiscal restraints.

Spanish stocks to considerSpain is not in nearly as bad a shape as the rest of the PIIGS when it comes to indebtedness. It is the second-largest PIIG after Italy, but it has the lowest government debt-to-GDP ratio of all.

There are extreme values appearing in the Spanish market, and that spells opportunity for patient investors. Because of the least-piggish status of the Spanish economy, the contrarian in me wants to be bullish on Spanish stocks that have seen large declines this year. There are only four listed American depositary receipts, though: BBVA(NYSE: BBVA), Santander(NYSE: STD), Repsol(NYSE: REP), and Telefonica(NYSE: TEF).

Repsol is an integrated oil company with exposure to Latin America that trades at 11.4 times earnings and yields 4.9%. All this printing of money to get out of the deflationary shock in Europe will have results on the price of oil sooner or later. Telefonica yields 7% and trades at 8.7 times earnings. As the dominant phone company in Spain with international exposure, it does not get any lower-risk for an investment that will pay you to wait until the economy stabilizes.

Spanish stocks to avoidBBVA and Santander are big Spanish banks that had fallen on the order of 40%-50% in their recent May lows from where they started 2010. Still, even with those declines, the fundamental picture of the Spanish economy has worsened, given the deflationary trend, in comparison to where those stocks traded in March 2009. Now we're getting reports that BBVA cannot renew funding, with zero investor interest in the rollover of its commercial paper to the tune of $1 billion. This is beginning to look like what happened to some U.S. banks in the fall of 2008. Stay away from the Spanish banks, no matter how cheap they seem.

The PIIGS' troubles are far from over, but bottom-fishing for selected Spanish companies is beginning to make sense.